A unified framework for understanding asset prices and aggregate fluctuations is critical for understanding both issues. I show that a real business cycle model with external habit preferences and capital adjustment costs provides one such framework. The estimated model matches the first two...

Many consumption-based models succeed in matching long lists of asset price moments. We propose an alternative, full-information Bayesian evaluation that decomposes the price-dividend ratio (p/d) into contributions from long-run risks, habit, and a residual. We find that long-run risks account...